HOUSTON – A Texas federal court has ruled in favor of a former federal bankruptcy judge and two prominent law firms, a finding which dismissed a racketeering lawsuit resulting from a clandestine romantic relationship between the former judge and an attorney at one of the firms in question.
On Aug. 16, U.S. District Court for the Southern District of Texas Judge Alla Moses found, with “some consternation”, for defendants David R. Jones, Elizabeth Carol Freeman, law firms Jackson Walker and Kirkland & Ellis, and against plaintiff Michael Van Deelen.
“The plaintiff alleges that the defendants – a former Chief United States Bankruptcy Judge, his romantic partner and two firms with nationally-renowned bankruptcy practices – rigged the nation’s busiest bankruptcy court for profit and prestige. This scheme propelled the defendants to national prominence and yielded tens of millions of dollars in attorneys’ fees, all drawn from bankruptcy estates at the expense of creditors. The defendants advanced this scheme, the plaintiff claims, through a pattern of deception that included the concealment of a romantic relationship between then-Chief Judge David R. Jones and Elizabeth Freeman, a partner at Jackson Walker, [a bankruptcy attorney] and Jones’s former law clerk,” Moses said.
“This relationship, while unknown to the public, was an open secret among the close inner circle of lawyers whom Jones appointed to dozens of the most lucrative bankruptcy cases in the country. According to the plaintiff, the defendants’ scheme diminished the financial recovery of parties, like him, with a pecuniary interest in the cases Jones oversaw. The plaintiff ultimately seeks relief from what he calls ‘perhaps the most significant bankruptcy scandal in U.S. history.”
Last October, Jones resigned from U.S. District Court for the Southern District of Texas, after the U.S. Court of Appeals for the Fifth Circuit found Jones had likely committed misconduct with Freeman.
Prolific plaintiff Van Deelen, first brought suit against Jones that same month and alleged charges under the RICO statute, fraud and conspiracy, among others; he added the other defendants in an amended complaint he filed in January.
McDermott International, an offshore energy servicer in which Van Deelen was previously an investor, filed for Chapter 11 bankruptcy in January 2020.
In order to remedy the bankruptcy, McDermott International proposed it would liquidate over $4.6 billion of its debt and sell one of its divisions to raise $2.72 million. In March 2020, Jones authorized the proposal.
Unsatisfied with the plan, since his investment shares would be dissolved within it, Van Deelen instead sought forfeiture of his legal fees from both Jackson Walker and Kirkland & Ellis, in addition to other damages.
According to Van Deelen, Kirkland & Ellis received more than $162 million in attorneys’ fees on cases where it served as lead counsel, Jackson Walker served as co-counsel and which came before Jones.
Over the course of Freeman and Jones’ relationship, Jones oversaw at least 26 bankruptcy actions and awarded Jackson Walker in excess of $12 million in attorneys’ fees, including $1 million.
Freeman left Jackson Walker in December 2022. The firm was under the impression Jones and Freeman’s relationship had ended nearly three years before her departure.
Jones motioned to dismiss the case in January, arguing that the ruling he made in his judicial capacity could not be used as grounds for a personal lawsuit against him – and, separately, the other defendants motioned to dismiss the case in March, arguing that Van Deelen could not show he had suffered losses in the McDermott case.
Moses agreed.
“The plaintiff has not shown that the defendants’ actions deprived him of anything he had not already lost long before Jackson Walker and Kirkland [& Ellis] requested attorneys’ fees,” Moses said.
Kirkland & Ellis had also sought sanctions against Van Deelen, but Moses rejected that demand.
“The Court takes no pleasure in this result. The plaintiff’s allegations, if true, cast doubt on the integrity of numerous high-profile bankruptcy cases. Litigants should not have to wonder whether the judge overseeing their case stands to gain from ruling against then; but in Jones’s courtroom, they did. Dismissing the plaintiff’s allegations at this early stage deprives him of discovery tools to further investigate his claims and potentially try this case to a jury of his peers,” Moses said.
“Of course, the plaintiff is not alone in investigating these allegations – the U.S. Trustee has been seeking to claw back attorneys’ fees paid to Jackson Walker and, by all indications, has been vigorously investigating the Jones-Freeman relationship. And thus, this saga continues. But the damage has been done. Public confidence in our courts is difficult to rebuild. No one litigant – no matter how zealous or well-represented – can lift the specter of impropriety these allegations have cast over the courthouse in which, until recently, half of all large bankruptcy cases were decided. This could have, and should have, been avoided.”
U.S. District Court for the Southern District of Texas case 4:23-cv-03729
From the Southeast Texas Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com